The Definitive Guide to Pricing in Online Retail

Let’s be honest, the topic of pricing does not have the most enticing facade. If someone were to walk up to you at a bar and said “Hey, let’s talk about pricing!”, you might not be very enthusiastic. But pricing in retail has so many dimensions and forms, and it’s incredibly important for retailers to choose a pricing strategy that works best for their business.

Let’s improve pricing’s reputation. It’s central to any retailer’s business and deserves to be discussed, especially when it comes to online retailers. Pricing products online requires a lot of work and strategy, and for a good reason. Shoppers are becoming used to seeing lower, more competitive prices online. There are several reasons why online retail is growing, and price competition is one of them.

As an online retailer, you have to make sure you’re offering the right price at the right time. Competitive pricing is the most important factor in a purchase decision for 80% of online shoppers, so it’s important to deliver what’s expected of your business. Branding can give you wiggle room as to what makes a price “competitive” or not, especially when your brand value is strong. To make sure you have all of your bases covered, regardless of your brand, we’ve put together a simple guide to explain how pricing online works and offer various strategies to consider.

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Price Perception

First thing’s first. Finding the right price for your products begins with the price perception of your brand. Basically, you want to understand how shoppers perceive your stores’ overall pricing. Perceived price can play a larger part in a consumer’s purchase decision than the actual price. For example, Amazon is perceived to have low prices all the time, but the 2014 holiday shopping season proved that they aren’t always the lowest. Costco had better deals on their TV selection, but customers still flocked to Amazon. Price perception can be as effective as promotions, but it can also be detrimental to your business.

If your prices are constantly floating above the competition’s and you have no tactics in place to justify a premium price, this might result in poor price perception. Price perception is a double-edged sword, and can cause you to be overlooked by consumers. This will hurt your traffic and conversion rates, and impact your bottom line. But good price perception can definitely help solidify your brand value. If you’re known for low prices, you can grow into a shopper’s go-to and become a benchmark against your competitors.

Psychological Pricing

Psychological pricing is exactly what it sounds like. It helps retailers leverage how the consumer’s brain works to make prices appear more appealing. It’s a tactic that almost every retailer has implemented, whether they meant to or not. Making your products more valuable through price doesn’t have to be hard, and psychological pricing tactics like charm pricing prove that.

Charm Pricing

Charm pricing is when retailers end their prices in 9s. These prices see a 24% increase in sales over their other-number counterparts. But why? It’s really quite simple. When a price ends in a 9, it makes the whole price appear to be less expensive. When you see a price as $19.99, you don’t think it’s $20, you think it’s $19. You’re making nearly a dollar more by adding the 9s, and making the purchase decision easier for shoppers. However, many luxury brands may want to steer clear of charm pricing. Whole pricing is best for luxury brands because lower prices can actually cheapen their brand. Whether or not charm pricing is right for you comes down to how you want to position your products and how you want your prices to be perceived.

Comparison Pricing

Not only are customers going to compare your products’ prices with your competitors, they’re going to be comparing your own products side by side to find cheaper alternatives. So obviously it’s important to remain competitive against other retailers, but remember to not undermine your other products. One way you can do this is by offering tiered products in your store in different price ranges. Relative price can sway a shopper’s opinion of the actual price, just like price perception. By putting different tiers at different price points, you can add value based on price and features.

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For example, let’s say you have two different models of the same product. One has twice the storage and speed capabilities of the other, but its price is less than double the amount of the other one. Shoppers with a smaller budget can be steered toward the cheaper option and the more expensive option appears to be more valuable, compared to the other options. It’s really a win-win for your product assortment.

Create Urgency

In online retail, time is of the essence. Prices constantly fluctuate because of the competitive landscape, so if you have the opportunity to have the lowest price while still making solid profits, make sure to make the most of it. Add discounts during popular shopping seasons, and provide a hard deadline for the sales. Highlight the fact that the discounts are for a limited time only, it will create a sense of urgency for your shoppers. Flash sales are also an incredibly effective way to do this. Emailing the announcement of a flash sale can help shoppers move quickly to the checkout screen to make sure they get the best deal possible.

But it’s important to do this in moderation. Constant discounts can hurt your brand and condition your shoppers to only visit your store during a sale. It’s also important to test different markdown prices. For example, it’s better to make 100 sales at 40% off than 110 sales at 50% off. Understand your products’ elasticities, and place the emphasis of discounts on products that generally carry wider profit margins. Don’t create drastic discounts, they will dilute your brand.

Dynamic Pricing

Dynamic pricing has become quite a hot topic in the world of online retail, namely because of its less-than-favorable reputation bestowed upon shoppers by the entertainment and travel industries. Dynamic pricing allows retailers to set flexible prices for their price-sensitive products. There are plenty of factors that go into a dynamic pricing strategy, such as competitor prices, seasonality, time of day, and more. Internal and external factors work hand-in-hand to make sure you’re always offering the right price at the right time with a dynamic pricing strategy.

Dynamic pricing doesn’t have to scare away customers. When implemented correctly, dynamic pricing can actually improve conversion rates and overall profit margins. It just requires accurate data collection and automated price changes based on that data. From there, you can analyze the strategy’s results on your bottom line and further optimize your strategies. That’s right, dynamic pricing isn’t synonymous with constant price cuts like many believe. Dynamic pricing is the best way to test different price points, both higher and lower than competitors, to find the sweet spot for your profits.

Loss-Leader Pricing

A loss-leader pricing strategy is synonymous with the word “bold.” The strategy results in retailers pricing products much lower than competitors to gain long term market share. It sacrifices margins for the sake of market penetration, especially when a product is new to the market. Amazon is known for doing this, and it is often extremely beneficial for them. Amazon’s margins are also notoriously low, so it may not be the best long term strategy for a younger business.

Loss-leader pricing is not the most sustainable pricing strategy of all time, but there are ways to make back your lost margins. You can implement slightly higher-than-normal prices in less competitive categories. That way you can still draw a great amount of attention to your low priced popular products, and then make some money with the rest on your inventory. Most sales come from your top selling assortment, so advertising the lowest prices on those products will attract the most pairs of eyes to your store. And a nice side bar of complementary products at a higher price can aid in cross-selling to make back your margins.

Market Basket Pricing

Market basket pricing occurs when you attract shoppers with low prices, but then offer add-ons and complementary products at higher prices. It’s the same idea of loss-leader pricing, but the other products are actual necessities for the original product that was purchased. It boasts impressive margins for the add-on products. In order to implement a market basket pricing strategy properly, you need to measure the shopper’s cart contents. From there, you can make recommendations on similar or complementary items for them.

Imagine you have a shopper who has a heavily discounted television in their shopping cart. Suggest a full-priced HDMI cord or Blu-Ray player to accompany it. It’ll make back some of the loss of the television.

Volume Discounts & Bundling

Sometimes you want to get your inventory moving faster, and volume discounts are one of the easiest ways to get them out the door. Volume discounts basically lower the price per unit as more units are purchased. It can increase the average order value of your shoppers’ transactions, and move old inventory. Instead of discounting each item individually, consider offering a free unit after previously purchasing a certain number at full price.

Another way to discount the price per unit is through product bundling. This is when retailers put related products together at a lower price. If you’re selling a coffee machine, offer to throw in a free grinder and a mug at a price lower than the sum of all three products individually. It sweetens the deal for customers, increases your order value, and helps you move old inventory out of your warehouse.

Margin-Based Pricing

You want to obtain the best margins on your products as possible. Margin-based pricing allows you to use your products’ margins to price against each other, a tactic known as anchor pricing. When you have two products that are substitutable, you can set a higher “anchor” price on one to drive volume to the one with higher margins. That way you keep your high-margin products competitive, and boost margins on products that have higher costs.

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If you’re starting to run low on the heavily discounted product, it’s time to increase the prices. While boosting your order value and moving inventory is awesome, it’s not worth running into an out of stock situation. So increase the price of the popular item and drop the price of the other. You can draw attention to the previous anchor and attract shoppers who might be on a budget to scope out a new deal.

Conclusion

We’ve covered just about all the pricing strategies that online retailers need to know (feel free to comment with any additional ones I’ve left out.) All businesses are different and what may work well for one business won’t for another. It all depends on your product assortment, brand, target market, and more. There are a ton of pricing strategies you can choose from and it’s up to you to find out which one is best for your business.

Regardless of your selling and pricing strategies, you have to make sure your inventory assortment is in tip top shape with the help of clean and accurate data. You don’t want to track the price of a ping pong table when you’re selling a t-shirt, and you don’t want to recommend bug spray to someone who is purchasing a tea pot. Pay close attention to your stores to make sure the customer experience is just as great as your optimized pricing strategy.

Brian Smyth

Brian Smyth is a former content writer at Wiser, a dynamic pricing and merchandising engine for online retailers. He holds a BS in business with a concentration in marketing from San Francisco State University.

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